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This is technically a complex problem where a subsidiary company has been acquired in between a financial year i.e. neither on the first day nor on the last day. Moreover, this problem has movements in the profits and reserves that has to be evaluated and categorized in to pre and post. One thing to be remembered, profits acquired by the parent company are always Pre. These are the profits which are earned by the subsidiary until acquisition. All the profits earned after acquisition will be divided in the Time Ratio if month wise data in unavailable.
Solution is explained below:
(i) As acquisition has happened on 1st January 2022, the period from the first day of the financial year (9 months) till the date of acquisition will be considered as Pre-Period and the remaining three months till the year ending will be considered as post period.
(ii) Now, the subsidiary company i.e. Yardley Ltd may be having some profits or reserves on the opening day of this financial year. These profits and reserves have technically been earned and accumulated during the previous years and hence not earned by the Majority i.e. Wipro Ltd.
(iii) This means, all profits that you see on the opening date i.e. General Reserves and Profit & Loss a/c will be considered as Pre elements and thereby, they will become Capital Profits. Just remember, these are the profits that have been earned by the subsidiary in the past, but now being acquired by the Parent Company.
Time Ratio = 9 : 3
1 - First box i.e. Rs. 20,53,260/- is the total capital profits which is being acquired by the Parent Company. This amount will be considered used in computing Cost of Control.
2 - Second box i.e. Rs. 93,330/- represents Revenue Profits which has been earned by Yardley Ltd due to the 93.33% control done by the Wipro Ltd.
3 - Third and Fourth box are the capital and revenue profits belonging to the non-majority (Minority). This has to be added with the non-majority i.e. 6.67% of the equity share capital in the minority company to derive Minority Interest.
Transfers to the General Reserves are done during the year end and are called appropriations. Alternatively, this transferred amount can be deducted from closing General reserves and added back to the Profits. This will give us the amount of profits before transferring to General Reserve. This increased amount of Profits can be divided in the Time Ratio without concerning the General Reserve. However, the whole opening balance of General Reserve will be considered as Pre i.e. Capital Profit.
As per the above table, the Parent Company i.e. Wipro Ltd has invested Rs. 38,00,000/- in Yardley Ltd and has acquired assets worth Rs. 34,53,260/- comprising of Rs. 14,00,000/- of Equity Share Capital and Rs. 20,53,260/- of Capital Profits.
The amount of difference i.e. Rs. 3,46,740/- is the extra money paid by Wipro Ltd to acquire Yardley Ltd is considered as Goodwill and is shown in the Consolidated Balance Sheet under Intangible Assets.
Minority Interest is the amount which is not owned by the Parent Co. i.e. Wipro Ltd. The above figure Rs. 2,53,410/- should be disclosed in the Balance Sheet under Equity and Liabilities.
After preparing necessary working, Notes to Accounts have to be prepared carefully. The final values in the notes are to be disclosed in the Balance Sheet along with the Note Number. It is recommended to understand Company Final Accounts first before preparing Consolidated Final Accounts.
Note: As Sundry Creditors of Yardley includes one transaction in the name of its parent company Wipro, it will be considered as a mutual transaction. In simple terms, if Wipro is a Creditor for Yardley, then Yardley becomes a Debtor to Wipro. Note that such transactions are supposed to be eliminated while preparing Consolidated Financial Statements. That means, it will be deducted from Creditors as well as Debtors.
Hence, Trade Payables will be Rs. 27,00,000/- and Current Assets which includes Trade Receivables will be Rs. 15,00,000/-.
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